NEED FOR THIS STUDY

Since the 80s, there has been turbulence in the banking and finance industry
worldwide as the pace of changes continues to accelerate. Changes are being
driven, above all by competition, technology and customer demand. The Internet
– both an opportunity and threat for banks - will intensify these effects.

The globalisation process and the opening up of the Indian economy; have given
reason for the banking sector to rethink its existing strategies. The penetration of
computers and growth in Internet usage is making the customers crave for more –
more services, more convenience! People want to put their PC to as many uses as
possible. E-Banking is one such use; and a very important one at that.

These reasons and more have given rise to the need for such a project. Although
many researches and projects have been conducted on this topic before, this
project is not redundant because e-banking is a very dynamic subject in today’s
scenario and hence it needs to be constantly updated and studied.

Due to the vastness of this subject, it is impossible to include every single detail,
hence wherever necessary, annexure have been attached.

PRE E-BANKING SCENARIO IN INDIA

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 Traditional Banking
Traditionally the relationship between the bank and its customers has been on a
one-to-one level via the branch network. This was put into operation with
clearing and decision-making responsibilities concentrated at
the individual branch level. The head office had responsibility
for the overall clearing network, the size of the branch network
and the training of staff in the branch network. The bank
monitored the organization’s performance and set the decision-making
parameters, but the information available to both branch staff and their customers
was limited to one geographical location.

Traditional Banking Structure (Diag.1)

On IT Adoption

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 The Indian banking sector woke up to the world of
technology in early 1990s. The banking sector in India
has been dominated by the public sector banks, who
hold between them more than 80% of the total asset
base. New private sector banks and foreign banks have
tended to concentrate their efforts more on the top 23 centres, which house the
cream of the country's urban customers. These banks have taken the lead in
technology adoption and have succeeded in building up a substantial base of
technology savvy, high-end customers.

Making an observation about the adoption of technology by the banks, P.C.

Narayan, vice-president (IT and retail banking) of Global Trust Bank Ltd, says,
"The rate of adoption of IT by foreign and private sector banks in the country has
been significant over the last five years. This can be attributed largely to intense
competition as well as the Internet phenomenon worldwide. A number of banks
in the public sector have also accelerated the pace of IT deployment, largely
because of the competitive pressure brought upon them by private sector banks
and foreign banks."

Though in the beginning the employees resisted computerisation (especially in

nationalised banks), the management finally succeeded in convincing its
employees about the benefits and need for adoption of technology. Says P.
Seshadri Rao, a financial consultant based in Hyderabad, "The basic reason for
getting the nod for computerisation was the competition from private banks.
Once the gates were opened to the private sector to operate banks, they started
with a bang, thereby forcing nationalised banks to reconsider their way of doing
business."

A SBI official in Delhi echoes the same sentiments: "Needless to say,

competition from foreign banks was one of the motivating factors for us to switch
to computers. But housekeeping scored over everything else. Maintaining books
and regular tasks like computing interest at the end of the calendar year was
tedious. The quantum of database was so huge that computerisation was the only

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way out. Banks would have certainly started downing their shutters had banking
software not taken over the reins."

In sharp contrast, most of private banks like GTB, HDFC and ICICI started their
operations with the use of technology. And with these new banks wooing the
customers by offering what was till then an unknown phenomenon-customer
service-the nationalised banks were forced to take remedial steps. "The
compulsion for private banks to adopt a very high level of IT was driven by their
desire to contain their operating cost at the lowest levels and at the same time be
able to offer a wide variety of products and services in the quickest possible
time," observes Narayan.

Commenting on the reasons for public sector banks

being laggards in the adoption of technology, State Bank
of Mysore managing director Sitarama Murty says: "The
private banks started with a clean slate. They hired
technology savvy people. On the other hand, public sector banks didn't have those
advantages. We need to follow the public sector bank's rules and regulation
while hiring people. We can't appoint computer professional in the top
management directly."

Computerisation of all branches, especially in semi-urban and rural areas, is still

a far cry for public sector banks. "This calls for huge investments and retraining
of staff. I think these factors are inhibiting most of the banks to take technology to
rural areas. But since IT is becoming an integral and inevitable part of the
banking system, rural banks' computerisation should also happen very soon,"
comments a senior official with Andhra Bank. Explains P.K. Seshadrinathan,
CTO of SSI Technologies: "The key obstacles to introduction of IT are non-
integration or non-networking of branches, and a lack of corporate network.
Computerisation has been introduced but each branch acts as an island. And, of
course, cultural/social issues continue to pose problems. Overcoming these
obstacles, therefore, would be the biggest challenge by itself."

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However, the nationalised banks have taken to computerisation in the right
earnest. Today most of them have their own in-house IT department which not
only takes care of deployment and implementation issues but is also into
developing specific and customised applications for the bank. From SBI to
Canara Bank, everyone is expanding its IT division and making huge investments
to develop the division as a profit centre by itself. According to an SBI official,
"It makes more sense to have our own division which understands our needs and
comes out with a solution. It is not just cost-effective but also useful for a bank to
have a separate division that takes care of IT in totality."

Faced with deregulation, privatisation and globalisation, the Indian banks are
slowly looking at various options to stay ahead in the rat race. This has resulted
in the following recent trends:
Phone Banking
This means carrying out of banking transaction through the telephone. A
customer can call up the banks help line or phone banking number to conduct
transactions like transfer of funds, making payments, checking of account
balance, ordering cheques, etc,. This also eliminates the customer of the need to
visit the bank’s branch.

ATM (Automatic Teller Machine)

An ATM is basically a machine that can deliver cash to the customers on demand
after authentication. An ATM does the basic function of a bank’s branch, i.e.,
delivering money on demand. Hence setting of newer branches is not required
thereby significantly lowering infrastructure costs. These machines also hold the
keys to future operational efficiency.

THE INTERNET – A DISTRIBUTION CHANNEL

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Distribution channels are physical capacities to build up customer contacts in a
systematic way in order to inform, counsel and sell products and services. The
Internet is a so-called electronic distribution channel. Combined with self-service
terminals and telecommunication equipment electronic distribution channels are
technical channels within the class of media distribution channels. Another
example for a media distribution channel is direct mail.

Today, media distribution channels are an important way of distributing

information and managing standard transactions. Counseling is mostly done in
branch offices or by field workers. Together, personal and media distribution
channels are called internal distribution channels. On the other side there are
external distribution channels like salesman or franchising partners. The
following figure visualizes this classification.

Distribution Channels of Financial Institutions (Diag. 2)

Areas of Use of the Internet in Financial Institutions

Generally we may distinguish four classes of Internet use in financial institutions:

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  Information presentation
 Information presentation together with two way (asynchronous)
communication (e.g. email to request further information)
 Interaction with user (e.g. execution of programs with individual customer
data)
 Transaction banking (e.g. electronic payments)

Information may be provided in connection with one or

two way communication. One-way communication means
that the institution uses the Internet only as a presentation
medium for its products and services. The simplest way to
use two-way communication is to allow users to send
electronic mails to the server in order to ask for further information or make
suggestions with respect to the Internet site.

Interaction with customers requires quick information exchange. Information

provided by the user controls the information offered by the server. If the
customer is identified and authenticated connecting to operative systems of the
financial institution may be possible. Then, often very little information has to be
provided by the customer since data stored in the databases of the financial
institution may be used.

Presentation of product information may be used to initiate new contacts.

Implemented product models permit the construction of optimal insurance or
financing contracts by using simpler components. Using mathematical models the
customer may analyze his portfolios. To do so, he may use simulation techniques,
what-if-analysis and other similar techniques.

Most Internet presentations by financial institutions fall into one of these three
categories (actually most of them are within the first two groups). If actual
contracting is desired transaction management is necessary.

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There are a large number of different financial transactions, like e.g. customer
payments, securities transactions applications for loans or insurance acquisitions,
funds transfer, etc.

This is Electronic Banking – The New Era.

WHAT IS E-BANKING?

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A non-resident Indian (NRI) in Paris has an easy way to access money in this
fashion capital of the world. His Citibank account in India can be accessed
through an ATM in Paris, which in turn transmits information to Citibank’s
central hub in the US. The Indian rupees are converted to US dollars, which are
in turn converted into French Francs at the current exchange rate, the Indian
account is debited and the Francs made available to the NRI. Welcome to the era
of technology banking!

Traditionally, banks have used branch networks and distributed PC software as

their delivery channels to reach business customers. However, in the recent past,
a combination of distinctive factors require that banks rethink their strategy.
These factors include demands on time as a limited resource, rising real estate
expense, changing human resource and information technology infrastructure
and, most of all, fierce competition. All of these factors are forcing banks to
provide services to their business customers anytime, anywhere, anyhow in what
is termed as “boundary-less banking."

There is no denying the fact that in the past two decades information technology
has been the most rapidly changing industry in the world. But more than the rate
of change, what is remarkable is the way IT has changed the paradigms of
business in other industries. One industry that has really felt the impact of IT has
been the banking sector.

What is E-banking? Electronic Banking in simple terms means, it does not

involve any physical exchange of money, but it’s all done electronically, from
one account to another, using the Internet. Internet banking is just like normal
banking, with one big exception. You don't have to go to the bank for
transactions. Instead, you can access your account any time and from any part of
the world, and do so when you have the time, and not when the bank is open. For
busy executives, students, and homemakers, e-banking is a virtual blessing. No
more taking precious time off from work to get a demand draft made or a
Chequebook issued.

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Banks offer Internet banking in two main ways. An existing bank with physical
offices can establish a Web site and offer Internet banking to its customers in
addition to its traditional delivery channels.

A second alternative is to establish a ‘‘virtual,’’

‘‘branchless,’’ or ‘‘Internet-only’’ bank. The computer
server that lies at the heart of a virtual bank may be housed
in an office that serves as the legal address of such a bank, or
at some other location. Virtual banks may offer their customers the ability to
make deposits and withdraw funds via automated teller machines (ATMs) or
other remote delivery channels owned by other institutions.

Online systems allow customers to plug into a host of banking services from a
personal computer by connecting with the bank's computers over telephone
wires. The convenience can be compelling. Not only is travel time reduced, but
ATM machines, telephone banking or banking by mail are often unnecessary.
And, technology continues to make online banking, once attempted only by
computer enthusiasts, easier for the average consumer.

Banks use a variety of names for online banking services, such as PC banking,
home banking, electronic banking or Internet banking.

Can one imagine life without paper cash? Money has always been part of human
emotions. And although it is difficult to imagine that all those years of
savings at the bank is now just a whole bunch of bits and bytes, it is
becoming a reality and the sooner people adjust to it, the
better it is.

SERVICES OF E-BANKS

Internet banks offer a variety of features and perks, rushing to lure

online customers. The race is on to increase market share and create customer

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loyalty with features that make online banking friendlier, more useful, and less
expensive. E-Banking lures customers with ‘convenience’.

The three broad facilities that e-banking offers are:

Convenience - Complete your banking at your convenience, in the
comfort of your home or at any place you can access the Net.
No more Qs - There are no queues at an online bank.
24/7 service - Bank online 24 hours a day, 7 days a week and
52 weeks a year.

Below is a detailed review of features found in Internet banking around the

world.

Online applications
Consumers can begin their banking relationship with an online application. No
need to waste time driving to a local branch to begin a banking relationship.
Consumers can fill out and submit electronically all necessary information
needed to open a checking, savings account or even a fixed deposit. When the
application is submitted, the bank will mail you a signature card for its records
and request you to mail or wire your initial funds. Some firms like American
Express and CompuBank enable customers applying for an account to fund their
new account electronically via a credit card or cheque from another banking
institution. There are some firms such as Wingspan and USA BancShares.com
that enable customers to digitally sign their applications.

Account Access
Internet banking customers now have the ability to view their accounts online,
including checking, savings, loans and credit cards. No need to wait for your
monthly statements or wait in queue for the next available customer service
representative. Account access enables customers to view most recent activity on
accounts, including cleared checks, deposits, ATM transactions and balances as
of previous days activities. Customers no longer have to hold on to the cleared
checks, since their bank will store them for them online.

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 Account transfers
Internet banking customers have the ability to transfer funds to and from their
accounts online. With a simple online form, customers can move money from a
checking account to a savings account and vice versa
within the safety and convenience of their home –-
without having to visit the ATM. Funds transferred
online are updated in less than three hours. In
addition, customers can set up recurring transfers to accounts. A recurring
transfer will take place on the customer specified date, with a specified amount.

Bill Payment
Online bill payment enables customers to pay anyone, friends or family, as well
as a pay their bills electronically. As an add on feature to Internet banking, bill
payment enables customers to send paper checks to anyone or an electronic check
to any institution that accepts electronic bill payments. To use bill payment,
customers are required to set up their payees online. Customers then have the
ability to set up recurring, automatic payments to a specific biller on a specified
day or just a one-time payment. Arrange payments three to five days, before the
due date, to ensure timely delivery. It is important to note that not all banks
provide bill payment as a free feature.

Benefits at participating online merchants

The banks partner with online merchants to offer discounts when a purchase is
made with the card.

24/7 customer service

Although it is easy to yield to the temptation of allowing the Internet to replace
expensive branch personnel and overhead, many banks have found that an
customer service staff ready at any hour is well worth the expense. This can be
especially true as customers transition to online banking and need help learning
the features. Offering telephone and email contacts is a basic level of service.
Offering live chat assistance is the exceptional level.

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 Access to old transactions
Choices made in designing the Internet interface may include
how much history will be available online. Some banks have
chosen to show only 30-45 days, while others offer a history of six months
or a year.

Categorize transactions and produce reports

Functionality is king as online banking customers using these features enjoy a
Web interface that delivers the utility of a money management software
application.

Export your banking data

Most banks offering the management interface also allow easy downloading of
financial information into files that can be imported into Microsoft Money and
Intuit's Quicken.

Interactive guides & tools to help selection of proper product

Although online, interactive guides through a bank's products, adds complexity to
the programming it also serves the bank by assisting potential customers in
choosing new products or services. Interactive Tools to design a savings plan,
choose a mortgage, obtain online insurance quotes all tied to applications These
tools help remove some of the mystery involved in so many account options and
costs.

Loan status and credit card account information

Bank customers are familiar with reviewing their checking account
information, but many banks are adding the ability to look at one's
loan status and credit card information as well. Access to as many accounts held
at the bank seems to be the goal.

View digital copies of checks

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This, again, is removing a down side to online banking. It makes images of
checks available as replacement for sending out cancelled checks or sheets of
printed check images.

Online forms for ordering checks, stop payment, etc.

Convenience is popular and if a customer visits his or her online account
frequently it only makes sense to allow the ability to reorder checks or perform
certain other commands through the same interface.

These features and many others help customers save time, simplify their lives and
provide greater value than conventional banking.

ONLINE PAYMENT SYSTEMS

What is a Payment System?

Payment means the transfer of money. In its simplest form, a payment system is
an agreed upon way to transfer value between a buyer and a seller in a

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transaction. When coupled with rules and procedures, the payment system
provides an infrastructure for transferring money from one entity in the economy
to another. Payment systems can be distinguished by the mechanisms used to
transfer value in an exchange of goods or services.

Electronic Payment Systems

Electronic payment systems exist in a variety of forms, which
can be divided into two groups: wholesale payment systems and
retail payment systems. Wholesale payment systems exist for
non-consumer transactions--transactions initiated among and
between banks, corporations, governments, and other financial service firms.

Retail electronic payment systems encompass those transactions involving

consumers. These transactions involve the use of such payment mechanisms as
credit cards, automated teller machines (ATMs), debit cards, point-of-sale (POS)
terminals, home banking, and telephone bill-paying services.

Wholesale Payment Systems

Wholesale payment systems are also called Large Value Payment
Systems. Large value funds transfer systems are usually
distinguished from retail funds transfer systems that handle a large
volume of payments of relatively low value. The average size of
transfers through large value funds transfer systems is substantial
and the transfers are typically more time critical.

There are two types of wholesale payment systems – net settlement systems and
gross settlement systems. Large Value funds transfer systems can also be
classified according to the timing (and frequency) of settlement. Systems can in
principle be grouped into two types - designated time (or deferred) settlement
systems and real-time (or continuous) settlement systems, depending on whether
they settle at pre specified points in time or on a continuous basis.

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Net Settlement Systems
In a net settlement system, the settlement of funds transfers occurs on a net basis
according to the rules and procedures of the system. A participating bank's net
position is calculated, on either a bilateral or a multilateral basis, as the sum of
the value of all the transfers it has received up to a particular point in time minus
the sum of the value of all the transfers it has sent. The net position at the
settlement time, which can be a net credit or debit position, is called the net
settlement position.

Gross Settlement System

In a gross settlement system, on the other hand, the settlement of funds occurs on
a transaction by transaction basis, that is, without netting debits against credits.

Designated Time Settlements

Designated time (or deferred) settlement system is one in which final settlement
occurs at one or more discrete, pre specified settlement
times during the processing day. Designated time
settlement systems in which final settlement takes place
only once, at the end of the processing day, are called end of day settlement
systems. Currently, net settlement systems for large value transfers are typically
end of day net settlement systems that settle the net settlement positions by means
of transfers of central bank money from net debtors to net creditors.

In some countries, there are systems in which the final settlement of transfers
occurs at the end of the processing day without netting the credit and debit
positions - on a transaction by transaction basis or on the basis of the aggregate
credit and aggregate debit position of each bank. Such systems are often called
end of day gross settlement systems.

Real time Settlement Systems

A real time (or continuous) settlement system is defined as a system that can
effect final settlement on a continuous basis during the processing day. RTGS i.e.
Real Time Gross Settlement systems, as defined below, fall into this category.

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 Types of large value funds transfer system (Diag. 3)

Settlement
Gross Net
characteristics

Designated time Designated time Designated time net

(deferred) gross settlement settlement (DNS)

Continuous (real - Real time gross

(Not applicable)*
time) settlement (RTGS)

* By definition, netting involves the accumulation of a number of transactions

so that credits can be netted against debits and this is incompatible with
genuinely continuous settlement.

Retail Payment Systems

Retail payment systems are also called small value payment systems.

An important emerging mechanism for enabling small-value payment systems is

electronic money. Electronic money is a payment mechanism that is a direct
substitute for traditional cash; value is transferred electronically to pay for goods
and services at vending machines, retail establishments, over networks, or
through direct person-to-person exchanges.

Electronic money offers some features that make it an attractive

alternative over other payment mechanisms. Electronic money
does not have to be designed to faithfully emulate all the
properties of paper cash. It can be implemented to preclude some
features of paper cash, such as complete anonymity, while
including other desirable attributes of paper cash, such as full divisibility,
assignment of limits and constraints, and links to the current owner.

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The following are some types of electronic money available over the net
worldwide.

First Virtual
The account is set up by phone using a traditional credit card number and a First
Virtual account number is issued. Clients provide their credit card numbers to
First Virtual over the phone or other non-Internet method, and are issued a
personal account number to make purchases over the Internet. This payment
mechanism allows the user to order goods online and then charges the user's
credit card company on behalf of the online merchant. The merchant reports the
transaction amount with the First Virtual account number. First Virtual then
confirms the purchase with the customer via email. No special software is
required for either purchaser or merchant.

DigiCash
David Chaum, a mathematician and privacy expert, founded
DigiCash. This provider creates e-cash, proprietary electronic
cash tokens, which are marketed as being the equivalent of cash. An account is
established at a DigiCash-licensed bank with real money. Once established, the
customer can withdraw e-cash that is stored on the user computer's hard drive.
Using proprietary software, e-cash can be spent with an Internet merchant or with
anyone else whose computer is set up to deal in e-cash. Using public-key
cryptography, the digital tokens are said to be secure and can be registered and
verified by the issuer without revealing to whom it was originally issued. In
effect, these digital cash transactions are capable of being as anonymous as cash.
No transaction confirmations are necessary, meaning the merchant can
immediately ship the product.

CyberCash
This payment mechanism consists of a downloadable software package using
public-key encryption that is designed to assure the security of credit card
transactions over the Internet. The system protects the customer's authentication

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data. An account is set up and acts as an Internet front end to any existing credit
card that is designated. When a purchase is made, proprietary software is used
that sends the purchase and account information in encrypted form to the account
provider. The provider in turn sends the information to the appropriate financial
organization for processing.

NetCash
This concept is similar to e-cash, except that it does not require any special
software to use. NetCash is transmitted across the Internet using an
encryption scheme known as PGP (pretty good privacy). To get
NetCash, a party must send a check or money order to the company's
headquarters. The company returns electronic coupons via e-mail.

NetChex
This payment mechanism is similar to CyberCash for checking accounts.

Millicent
The Millicent method is developed by Digital Equipment Corporation (DEC) to
manage small and smallest payments (e.g. payment for getting information from
the Internet about news and stock quotations or payment for small programs like
Java-applets)

The customer buys a broker scrip with a defined value by using his credit card or
by debiting a suitable bank or broker account. Such scrip is like a telephone card.
At the time of purchase the customer exchanges parts of the scrip into a dealer's
scrip. This scrip is then send to the dealer. The dealer collects all scrips and
exchanges them into "real" money.

Electronic Checking Accounts

Several organizations and coalitions of organizations have been trying to create
ways of using existing checking accounts over the Internet. In most of those
efforts, the consumer uses his or her checking account with a bank or service and
then draws down those funds using special electronic checks and digital

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signatures. Generally, those programs are not as close to a major commercial
introduction as are those based on credit cards or electronic scrip. Many
observers feel that electronic checks, despite a slow start, could become a widely
used method for making payments.

Credit Cards
The credit card is usually a four-party card which involves two banks
in each transaction, the cardholder's bank (the issuer of the card) and
the retailer's bank. The retailer hands over the credit card slips to its own
bank for payment, less a discount, typically about 2-3%. The retailer's bank then
passes the slips on to a clearing system. The clearing system presents each slip
for payment to the bank that issued the card on which it was written. The issuing
bank collects from the cardholder. All of these exchanges are now done by wire.

Debit Cards
With a debit card, the payment comes right out of your checking account. The
card is issued by the entity that holds your money on deposit, probably a bank,
but possibly a money market fund. When you present your card, money is
transferred from your account to the merchants account that day.

Stored Value Card Scheme or Smart Cards

Smart card technology represents a real change in how and where information is
processed. The smart card is a credit card-sized payment mechanism with an
integrated circuit chip embedded within the card. The embedded chip enables the
card to contain significant amounts of data including prepaid stored value. The
embedded chip can also hold programs that interact with data either contained on
the chip or external to the chip. These programs can be permanent and
unchangeable or can be modified when the card is connected to a network. Data
can be stored, updated, and retrieved both when the card is issued and throughout
its life. However, because of the embedded chip, the smart card operates as a
stand alone payment mechanism--in effect, a direct substitute for cash--without
requiring online network connections. This stored value can be accessed and
altered by terminals at a merchant's establishment or at remote locations. A

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consumer with a smart card can go to a bank or ATM and have the card loaded
with a certain amount of value. The consumer can then proceed to make
purchases, up to the amount of stored value, in the same manner as if currency
were being used. At each terminal, the device reads the smart card to determine
that there is sufficient value available and deducts the amount of the transaction.
When the card's value has been exhausted, the consumer can return to the bank or
ATM to replenish the value.

The strength of this scheme is that it avoids the need to identify the user and
access the user's bank account or credit card in order to verify funds availability
because the only funds available are those that are on the card. This eliminates
the problem of retailers who are reluctant to accept payment by check due to
concerns about funds availability.

Mondex
Mondex is owned by Master Card and National Westminster Bank of London
and is being tested in several countries. Mondex uses a smart card to store
electronic cash that can be used to pay for goods and services in the same way as
cash but with some key benefits over traditional cash.

ONLINE SECURITY SYSTEMS

The concern of security remains the largest barrier to the growth of online
banking. Most people seem to believe that it is a hacker jungle out there, and stay
very wary of trying to simplify their lives by using cyberspace.

Most institutions providing online banking services are very security conscious.
After all, they wouldn’t want to open their computers to a stampeding public,
would they? The security measures that organizations take over the Web are

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simply invincible, unlike the surveillance cameras and lobby guards posted in
many banks. If the general public is not aware of, or does not understand, the
many features put into place to guard their finances, then people remain skeptical.

Depending on how online accounts are accessed, security can be guaranteed in a

variety of ways. Moreover, when a bank offers online service, it is not opening its
mainframe computers to the world. Usually, the bank installs a group of separate
computers that stand between the mainframe computer and the network that will
deliver data to your PC. At several points along the way, protection is built in.

Some of the most common security features are firewalls, data encryption, and
passwords/personal identification numbers.

Firewalls
A firewall is a computer or software that protects the bank’s computers and data
from being accessed by any outsider. This firewall is located at the point where
the bank’s world connects with the rest of the world. This firewall is basically a
gatekeeper, checking each attempt at delivery of data with a list of strict
specifications; any criteria not met; does not make it past the firewall.

Public Key Infrastructure

Public key infrastructure can be defined as a solution to ensure secure electronic
business communication incorporating signatures and encryption technology.

Every user in a PKI transaction owns a pair of keys: A public key known to
everybody and a private key known only to the owner. The keys have 2 main
characteristics. One, they are complimentary sets of passwords. This means that a
document encrypted by a public key can only be decrypted by a private key and
vice-versa. Two, the keys are a unique pair.

Lets now see how PKI compares with existing security technologies. Anti-virus
is merely for integrity, Firewalls give authentications and confidentiality, Access
is similar to firewalls; encryption ensures confidentiality. Thus PKI emerges as

22
the only solution that guarantees all the four pillars of security and trust viz.
authentication, non-repudiation, integrity and confidentiality.

Encryption
Encryption is the process of converting information into a more
secure format for transmission. In other words the plain text is
converted to scrambled code while being transmitted, and then
decrypted back to plain text at the receiving end of the
transmission. It is comparable to writing a letter, converting it to code, putting it
in an envelope and mailing it with the recipient descrambling the code.

Currently, there are 2 levels of encryption generally available in web browsers:

40-bit encryption, and 128-bit encryption. Most commonly available browsers
use 40-bit encryption. However, the 128-bit browser offers the highest level of
encryption and provides the best protection when transmitting confidential data
over the Internet. The difference between these two types of encryption is one of
capability. 128-bit encryption is exponentially more powerful than 40-bit
encryption.

Digital Signatures
Digital signatures essentially use encryption to scramble information in a way
that only the party who issued the certificate (usually the online store or a trusted
third party) can decrypt and read.

By using digital signatures, consumers are reassured that any sensitive

information they send across the Web, such as postal addresses and credit card
details, is protected from interception along the way. Meanwhile, online
merchants can be more confident that the customer placing the purchasing order
is indeed entitled to use the payment card in question. Security experts believe
that digital signatures will encourage more consumers to purchase goods online.

Access Codes

23
The access codes used to identify you to the online banking system are called
passwords, and are further protected by using PINs (Personal Identification
Numbers).

BENEFITS OF E-BANKING

Consumers are embracing the many benefits of Internet banking.

The following are a few advantages that e-banking gives to customers:

- Consumers can use their computers and a telephone modem to dial in

from home or any site where they have access to a computer.

- The services are available seven days a week, 24 hours a day.

24
 - Transactions are executed and confirmed quickly, although not
instantaneously. Processing time is comparable to that of an ATM
transaction.

- In general, the customer will find lower fees and higher interest rates for
deposits due to the reduced cost of operating online and not needing
numerous physical bank branches.

- And the range of transactions available is fairly broad. Customers can do

everything from simply checking on an account balance to applying for a
mortgage.

- The interface is very user-friendly and often intuitive. Additionally,

business customers will most likely use the Internet for more than cash
management, and they will be accustomed to a similar "look and feel"
among all applications that they use.

DISADVANTAGES OF E-BANKING

The most obvious disadvantage is: Technophobes need not apply i.e. if you are
still not comfortable using a computer, e-banking is not for you.

The other disadvantages are:

25
 Investment of time upfront can be formidable. The data entry is necessary
before the numbers can be massaged and money managed successfully.
Online bill payment is an example of an effort that requires setting up
which leads to ultimate convenience.

 Switching software or banks can mean re-entry of data, although Internet-

based systems are less impacted by this. But competition seems to be
minimizing this problem. The personal finance management software
Microsoft Money enables users of competing software to import data
easily.

 Like anything that deals with the transfer of large amounts of money,
security is a major factor of Online Banking. It is taken very seriously
during Online Banking procedures.

 With a system as complex as Online Banking, some

errors are inevitable. i.e.: An interrupted online
session; late arrival of payments etc. A mistake
made by either the user or the bank in question, can
affect both, causing problems. For Example: An 'Infinity' (ICICI’s Online
Banking Brand name) customer from Bangalore (who did not want to be
named) paid his cell phone bill through the bank, only to receive another
bill the following month, with late fees. The amount had been debited
from his account but not passed on to the cellular operator.

 When dealing with computers, there is always the concern of the system
crashing, viruses entering the system or a power cut. These are larger
problems and are not as easily solved. In all three cases, many people
would be affected, information may be lost and a back-up plan would
have to be initiated.

 Need an account with an Internet Service Provider (ISP)

26
IS E-BANKING FOR YOU?

For months, you received mailers and statement inserts promoting your bank’s
Internet banking capabilities. You kept thinking to yourself, "What does this do
for me?" and "does it really work?" You’re not alone. Millions of consumers

27
across the country have wrestled with the same questions. The following set of
questions will help a customer decide if e-banking is really beneficial to him.

Do you value your time? Traditional banks bind you to their opening and closing
times to do transactions. If you are often stretched for time to do your banking,
then you are an ideal candidate to try banking online. You can do it at your
convenience, and at any time of the day.

Would you like to reduce your banking fees? What a question to ask? But most
people don't realize that on an average a checking account costs hundreds of
rupees per year, in transaction costs, lower yields and ongoing fees. Many online
banks now offer free unlimited checking accounts.

Are you equipped to transact online? Do you have access to a computer, have
the devices to go online, and have an Internet Service Provider (ISP) service.
Since you intend to bank online, access to such a computer is key to your ability
to bank.

Are you comfortable with transacting online? If you are already browsing
online, you must be familiar with secure Internet protocols that are used to
transfer information over the Internet in an encrypted fashion. Do you feel secure
transferring or paying money online?

How frequently do you go to your bank branch? If you rarely need certified
cheques, drafts and foreign exchange or many such services that require use of
bank tellers, then you may be better served banking online. If your nearest bank
branch is miles away, then elect to try out banking online.
Do you get paid via direct deposit? If you do then you may be able to get a very
good deal from your online bank, many of whom will waive charges if you get
your pay deposited directly into your bank account with them.

Do you mail a lot of cheques towards your bill payments? Making cheque
payments towards your bills costs not only postage, but also valuable time. In

28
addition, traditional banks will charge you for every transaction. Using online
banking you can pay your bills online, often with the ability to make scheduled
payments when you want them -- very much like issuing a post-dated check. No
more delayed payments lost in the mail.

Do you use personal finance software? If you use Microsoft Money 2000, or
Quicken 2000 you will love banking online, since these packages support
banking online. You can download bank statements directly from your bank's
website. That makes the task of maintaining records, and financial planning a lot
easier.

Are you comfortable banking at an ATM (Automated Teller Machine)? You

may be one of those people who rarely need to go to your bank branch because
you are already 'ATM friendly'. Many online banks offer you the ability to do
your banking from ATMs where you can deposit checks and withdraw money,
and they offer rebates on a limited number of transactions at ATMs.

Do you trade stocks online? Many online brokers are now beginning to offer
products similar to online banks. So if you do already trade stocks online,
consider moving your banking online too, since many brokers may offer very
attractive deals for your banking business -- the objective is to keep your money
within their group.

PAYING SAFE

When you bank online, make sure your transactions are secure, your personal
information is protected, and your fraud sensors are sharpened. Although you
can't control fraud or deception on the Internet, you can take steps to recognize it,
avoid it, and report it. Here's how:

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 Use a secure browser - software that encrypts or scrambles the purchase
information you send over the Internet - to guard the security of your
online transactions. Most computers come with a secure browser already
installed. You also can download some browsers for free over the
Internet.

 Keep records of your online transactions. Read your e-mail - merchants

may send you important information about your purchases.

 Be prompt about reviewing your monthly bank and credit card statements
for any billing errors or unauthorized purchases. Notify your credit card
issuer or bank immediately if your credit card or checkbook is lost or
stolen.

 Read the policies of Web sites you visit - especially the disclosures about
a Web site's security, its refund and return policies, and its privacy policy
on collecting and using your personal information. Some Web sites'
disclosures are easier to find than others are - look at the bottom of the
home page, on order forms, or in the "About" or "FAQs" section of a site.
If you can't find a privacy policy, consider shopping elsewhere.

 Keep your personal information private. Don't disclose your personal

information - your address, telephone number, Social Security number, or
e-mail address - unless you know who's collecting the information, why
they're collecting it, and how they'll use it.

 Give payment information only to businesses you know and trust, and
only in appropriate places like order forms.

 Never give your password to anyone online, even your Internet service
provider.

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  Evaluate The Site - Make sure the online banking site you are considering
has depth (many pages), and is well designed. Unless you know a bank is
legitimate, don't accept a poorly designed site with broken images. If you
are unsure as to whether a online bank is legitimate look for a different
bank.

 Go to the bank, don't let the bank come to you - Don't accept unsolicited
email recommendations for online banks. You should search for the bank;
don't let a bank search for you. In this way you won't be the victim of a
web site masquerading as a bank when they are not. In the past few years
hackers have gotten email addresses of customers of some financial
service companies and sent email to them inviting them to fraudulent sites
in order to try to get personal information from them. PayPal experienced
this problem, when con-artists sent a email asking consumer to go to the
web site to review a large payment in their account. They gave the url of
PayPa1.com instead of the correct url PayPal.com (They substituted a 1
for the L). Know your banks online address and go directly to it.

 Don't choose an obvious password or username - Don't use variations of

any obvious people, numbers, or things related to your life. Do use a
combination of random numbers and letters. Many banks will provide a
random password and/or user name for you; use these. If possible change
the password to one only you know, and change it online over a secure
connection into the bank's official web site.

BENEFITS TO THE BANK

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Why should a bank ‘bank online’? Advantages previously held by large financial
institutions have shrunk considerably. The Internet has leveled the playing field
and afforded open access to customers in the global marketplace. Internet
banking is a cost-effective delivery channel for financial institutions.

The bank has an opportunity to generate revenue, decrease operational and

transactional costs, increase productivity, and attract new customers.

Ability to increase Revenue

Financially, the bank can benefit a great deal from providing
their customers with an online banking service. The bank has the
ability to increase revenue by generating user and transaction
fees for the use of a bill payment product and has the option of charging an
account access fee for the use of the online system. Online banking provides an
excellent promotional opportunity to generate revenue by helping the bank to
cross-sell products such as credit cards, loans, certificate of deposits, and other
financial services.

Save Money
In addition to making money, the bank can save money with an Internet banking
system. Online banking can actually decrease operating costs by
reducing the daily reproduction and distribution of paper-drawn
transactions and delivering and processing statements for accounts,
credit cards, and bills. Performing transactions via the Internet also provides cost
savings, as indicated by a study done by Booz, Allen & Hamilton that shows a
transaction over the phone costs $.54, at an ATM it costs $.27 and via the Internet
the cost is $.01. Using the Internet to perform transactions greatly reduces the
cost to the bank.

Improves Productivity
Internet banking improves productivity as well. Bank representatives are able to
process data more quickly and efficiently; track account activity with automated
reports, help customers achieve daily tasks via the Internet, and reduce time spent

32
handling service problems. There can be a dramatic reduction in the number of
customer service calls, as some banks that are providing this service has proven.

Marketing & Competitive Tool

Internet banking also offers the bank an exceptional marketing and competitive
tool. Large banks such as Nations Bank and Wells Fargo, in the United States,
have already capitalized on the Internet as a mechanism to attract new customers.
The majority of people using the Internet are middle to high income and polls
indicate that 50% of the people online are either in professional or managerial
positions. These people are also the ones who want to have the convenience of
online banking for home or business use. This is an excellent opportunity for the
community bank to keep their hometown customers from looking to national
institutions for an online product.

Innumerable services are available via the Internet today. Internet banking
provides a higher level of convenience that both commercial and retail customers
desire to have. With this service, the bank not only has the opportunity to manage
their business better, but can also help their customers achieve a much more
efficient process of managing their finances.

WINNING ONLINE STRATEGY

Perhaps most banks have already launched online banking, but customers aren't
exactly bringing down their Web server with a heavy demand for the service.

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How do you successfully sell Internet banking to your customers, and why might
it be in your bank's best interest to do so?

Here are four guiding principles that can help any bank construct a winning
online strategy:
Know thy customers (and what they want and need)
Before you construct your online offering, carefully assess your customer base
and its needs to determine whether
a) They want Internet banking;
b) They expect Internet banking; and
c) They would use Internet banking.
The only way you can meet their expectations is if you know what their
expectations are.

If you're inclined to believe your customers don't really want Internet banking or
are not "ready" for it, consider the "health club effect." Numerous studies have
shown that the existence of workout facilities in a hotel can play a major role in a
customer's choice of one hotel over another, yet when it comes right down to it,
only a tiny percentage of guests actually utilize the exercise rooms. Why would
the availability of a service the customer will probably never use influence his
choice? It's all about options and the warm fuzzy feeling a traveler has in
knowing that if he should awaken full of energy, with a desire to be proactive
about his health, the right equipment will be just a few steps away.

Just as the hotel guest entertains the fantasy of virtuous exercise

habits, so do some bank customers find comfort in knowing that
if they should decide to embrace the wired world, they will find
the Internet doors to their account information wide open. Don't
underestimate the impact of your online offerings on customers that do not
directly take advantage of them. I overheard a conversation in a bookstore
recently that could only be described as "My bank's cooler than your bank."
Imagine. Bank offerings as status symbols!

34
Analyze key factors about your customers:
 Are they mobile, such as students or frequent travelers? Is the ability to
engage in distance-banking important to them?
 Do they frequently use debit cards? Could they benefit from online
tracking of debit card transactions?
 Do they have hectic schedules that would preclude visits to the bank's
offices?
 Are they computer-savvy?
 Are a significant number of them using money management software
already, such as Microsoft Money or Intuit's Quicken?
 Do they like to have control?
 To what extent does your target market consist of business customers?
Large business or small businesses?
 What features would be most important to them? The ability to view
online statements? See imaged copies of individual items? Transfer funds
between accounts? Do online bill paying? Download statements to their
computer?

Assess customer needs -- and desires -- to help you plan the features your Internet
offerings should have.

Think long and hard about the benefits of Internet banking to the bank.
What is your goal in implementing online banking? What are you trying to
accomplish?

 Can you position your bank as a market leader and attract customers
by implementing Internet banking?
 Is the competitive marketplace driving you to implement Internet
banking as a defensive measure to avoid losing customers to
competitors who offer it?
 Can Internet banking be used to increase satisfaction and loyalty?

35
  Could Internet banking provide long-term cost savings?
 Can you solidify the bond you have with your customers by offering
online banking? Keep student customers even after they graduate and
move away? In this increasingly mobile society, can your bank serve
as an anchor for customers who find employment in another locale?
 Do you need to offer Internet banking now in order to lay the
foundation for product/service offerings such as online bill payment
and bill presentment?
 Can you provide superior customer service via the Internet by using it
to:
provide online loan applications, permit a self-service way for the
customer to access account information, order checks, place stop
payments, review account agreement provisions, shop for banking
products, conduct comprehensive reviews of all business with the
bank; offer how-to information that customers can learn from, like
tutorials on the home mortgage application process, checking account
basics, and how to keep a credit report clean.
 Can you cross-sell other banking products and services through this
channel? Does it provide unique marketing opportunities?
 Can you appeal to customers in a wider geographic area than you can
attract with your brick and mortar offices?
 Can you establish a different image online than your bank has in the
"real" world, thus appealing to a whole new customer demographic?

Once you have resolved the issue of what you are striving to
achieve, you can build a site and an Internet banking offering
that works to accomplish those goals. Don't believe for a minute
that all Internet banking sites are created equal. Your online presence
can -- and should -- be distinct and original.

Choose your Internet banking solution provider(s) carefully.

36
Don't ride the wrong horse into the Internet banking arena. You run the risk of
ending up with a circus pony instead of a stallion. You cannot stake your
reputation on a company whose product is unreliable or does not compare
favorably to the competition. Internet customers are notoriously demanding --
and critical. They want service fast and they don't want a site that is lame.

Make sure the solution provider you choose can provide

reliable and dependable service. Downtime results in angry
customers and reduction in use. Your institution's reputation
suffers when customers cannot reach your site. It's like having an "Out of Order"
sign on your ATM.

Make the sign-up/registration as easy as possible, yet don't minimize security or

compromise your ability to accurately determine exactly who you're dealing with.

Test drive! Before you make your choice of a software solution, arrange to have a
large number of your staff members try it out. Having someone else give you a
demonstration is not what I'm talking about. I'm talking about having real people
sit down under the same sorts of conditions your customers will be using the
product -- at modem speeds, typically, with a wide range of computer types,
monitor settings and different browser versions. Rather than having a vendor
representative walk your employees through the process of using the software,
have the employees try to figure it out themselves. Those are the conditions your
customers will likely be coping with. Figure out what other institutions have used
the vendors you're considering and open online accounts with them to test drive
the service under true market conditions, rather than making a decision based
upon demos alone.

Ask the following questions:

 Is it intuitive?
 Does it do what the user wants and expects it to do?
 Do the pages load quickly enough?

37
  Is it "forgiving"? In other words, does it allow the user to recover from
mistakes?
 Is it reassuring, in terms of conveying a sense of security?
What is the frustration factor? How many times do the testers think they
should take a particular path to accomplish something, only to discover
that's not the correct choice?
 Is the overall experience of the user a positive one?

Think long and hard about the features your customers want (that you're willing
to pay for!) Test the waters. You can move slowly, if that's your style. For
example, first offer online banking without bill payment. Then add online bill
payment when you feel more comfortable with it.

Be sure you choose a vendor who can supply the features that are important to
you. Do your homework! Internet banking is an area that will constantly be
evolving. You'll want a solutions provider who values careful innovation.

Once you have it, PROMOTE it!

You've made a major investment -- both in time and money. Make the investment
count -- promote it heavily. Pull out all the stops. Increase awareness of your new
Internet banking product in every way possible.

 Have buttons made up for your employees to wear, touting your new
Internet banking product.
 Post eye-catching signs in all your banking offices.
 Put banner ads on your Web site, particularly if you already have Web
traffic.
 Run ads that let customers and prospective customers know about the
new service.
 Play up the features of the new service in special statement stuffers.
 Mention the service on your drive-in envelopes.
 Draft a press release. This is news!

38
  Seek out opportunities for employees with public speaking skills to
speak about banking on the Net.

Get all your employees online first, so that they are knowledgeable about how it
works and what the benefits are. Encourage the employees to become Net Nerds!
Consider offering a low interest/no interest loan to employees to help them buy
computers for their homes.
Take the "Would you like fries with that burger?" approach with customers.
Develop the habit of asking if they'd like to sign up for
Internet banking any time they use (or sign up for) any
other service.

Consider incentivizing in painless ways. What can you offer to customers who
open an online banking account? There are lots of things you can offer that won't
cost you anything.

Collaborate with local merchants. Form alliances. Co-market.

Promote Net use in general. Have a Net-enabled computer at the bank and
schedule demonstrations. Walk your customers through the process with a
fictional account. Offer programs in your community on using the Internet, and
make your Internet banking product one component of the program.

Plan an Open House Internet class at the bank, free to all customers. Along with
punch and cookies, serve up some solid suggestions for using the Net.

Think of ways to add value to your Internet banking pages. For example, you
could have a "newsletter" type of content on your Internet banking site, with
content that is regularly updated. Topics could include such things as teaching
kids about money, planning for retirement, how to know if it's time to refinance
your mortgage, how to tell whether buying or leasing a car makes the most sense.
Add pertinent calculators to make the site truly interactive.

39
Utilize your Web pages to humanize the bank, tell about what the bank is doing
to help the community.

Make cross-selling easy. For example:

 When John D’Souza logs in, if his safe deposit lease is about to expire,
have a message pop up on the screen telling him so and give him the
option to click a button to renew automatically;
 When rates go up on CDs or down on loans, brag about it online.
 If you offer discount brokerage services, target customers who might be
interested and make it easy for them to sign up or learn more.
 Consider providing Internet specials, complete with printable coupons.
For example, you could offer Rs5.00 off their next cheque order, Rs20.00
off their first year's safe deposit box rental, etc.

Start with the consumer side first. Work the kinks out. Then roll out the service to
your commercial customers.

Stress the benefits of online banking -- from customer control and convenience
on down.

Don't scare customers away by overpricing the service. Done

right, Internet banking can make you money by saving money, but
you can't reap the cost savings if your customers aren't using it.

Offer online banking to all your customers. Don't make assumptions about which
ones will want it or need it, and don't reserve it for your "best" customers.
Typically, it's not the best customers who flood your customer service department
with time-consuming inquiries about balances, deposits received, stop payments,
check posting and the like. It's the customers who live on a shoestring for whom
checking the balance can be a daily activity.

40
 The Bottom Line
Nicole is six years old. Since she was a baby, she has ridden with her mother
through the bank's drive-in. Each time, the nice teller has given her a lollipop.
Nicole already knows that this is the bank she wants an account at -- they know
how to make her happy. Your challenge is to figure out how to construct the
virtual equivalent of giving candy at the drive-through. When you figure out how
to deliver a service online that brings a smile and a pleasant experience to the
customer -- a service that delivers what the customer wants, you will achieve
success in selling Internet banking.
WORLD SCENARIO

So the online revolution is upon us. It seems that everyone is taking to the
Internet. According to research done by CyberDialogue, there were 53.5 million
cybercitizens in 1999. Approximately 6.3 million of these people were banking
online in 1999, as well. This was up from 6 million using online banking services
in 1998. The sources I found predicting the number of online banking users in the
next several disagreed slightly. CyberDialogue says that 24.2 million people will
be using the virtual bank by 2002. The International Data Corp’s research showed
that 32 million users would be using the Web to visit their bank by 2003. In any
scenario, a great majority of current users are aware of online banking, and a
large number of those people plan to begin using online banking in the next 12
months.

A global survey by Cap Gemini Ernst and Young revealed that while 45 per cent
of transactions are currently made via branches, brokers or agencies, this is
predicted to decrease to 29 per cent by 2003.

The experience of various countries, as far as e-banking is concerned, is

discussed here.
United States Of America
In the USA, the number of financial institutions and commercial banks with
transactional web sites is 1275 or 12% of all banks and thrifts. Approximately
78% of all commercial banks with more than $5 billion in assets, 43% of banks

41
with $500 million to $5 billion in assets, and 10% of banks under $500 million in
assets have transactional web-sites. Of the 1275-thrifts/commercial banks
offering transactional Internet banking, 7 could be considered ‘virtual banks’. 10
traditional banks have established Internet branches or divisions that operate
under a unique brand name. Internet transactions are expected to increase from
3% currently to 12% by 2003.

United Kingdom
Most banks in U.K. are offering transactional services through
a wider range of channels including Wireless Application
Protocol (WAP), mobile phone and T.V. A number of non-
banks have approached the Financial Services Authority
(FSA) about charters for virtual banks or ‘clicks and mortar’
operations. There is a move towards banks establishing portals.

Sweden & Finland

Swedish and Finnish markets lead the world in terms of Internet penetration and
the range and quality of their online services. Merita Nordbanken (MRB) leads in
“log-ins per month” with 1.2 million Internet customers, and its penetration rate
in Finland (around 45%) is among the highest in the world for a bank of ‘brick
and mortar’ origin. Standinaviska Easkilda Banken (SEB) was Sweden’s first
Internet bank, having gone on-line in December 1996. It has 1,000 corporate
clients for its Trading Station – an Internet based trading mechanism for forex
dealing, stock-index futures and Swedish treasury bills and government bonds.
Swedbank is another large-sized Internet bank. Almost all of the approximately
150 banks operating in Norway had established “net banks”.

Australia
Internet Banking in Australia is offered in two forms: web-based and through the
provision of proprietary software. Initial web-based products have focused on
personal banking whereas the provision of proprietary software has been targeted

42
at the business/corporate sector. Most Australian-owned banks and some foreign
subsidiaries of banks have transactional or interactive web sites. Online banking
services range from Financial Institutions’ websites providing information on
financial products to enabling account management and financial transactions.
Customer service offered online includes account monitoring (electronic
statements, real-time account balances), account management (bill payments,
funds transfers, applying for products on-line) and financial transactions
(securities trading, foreign currency transactions). Electronic Bill Presentment
and Payment (EBPP) are at an early stage. Generally, there are no ‘virtual’ banks
licensed to operate.

New Zealand
Major banks in New Zealand offer Internet banking service to customers; operate
as a division of the bank rather than as a separate legal entity. Reserve Bank of
New Zealand applies the same approach to the regulation of both Internet
banking activities and traditional banking activities. There are however, banking
supervision regulations that apply only to Internet banking. Supervision is based
on public disclosure of information rather than application of detailed prudential
rules. These disclosure rules apply to Internet banking activity also.

Singapore
The Monetary Authority of Singapore (MAS) has reviewed its current framework
for licensing, and for prudential regulation and supervision of banks, to ensure its
relevance in the light of developments in Internet banking, either as an additional
channel or in the form of a specialized division, or as stand-alone entities
(Internet Only Banks), owned either by existing banks or by new players entering
the banking industry. The existing policy of MAS already allows all banks
licensed in Singapore to use the Internet to provide banking services. MAS is
subjecting Internet banking, including IOBs, to the same prudential standards as
traditional banking.

Hong Kong

43
There has been a spate of activity in Internet banking in Hong Kong. Two virtual
banks are being planned. It is estimated that almost 15% of transactions are
processed on the Internet. During the first quarter of 2000, seven banks have
begun Internet services. Banks are participating in strategic alliances for e-
commerce ventures and are forming alliances for Internet banking services
delivered through Jetco (a bank consortium operating an ATM network in Hong
Kong). A few banks have launched transactional mobile phone banking earlier
for retail customers.

Japan
Banks in Japan are increasingly focusing on e-banking
transactions with customers. Internet banking is an important part
of their strategy. While some banks provide services such as
inquiry, settlement, purchase of financial products and loan
application, others are looking at setting up finance portals with non-finance
business corporations. Most banks use outside vendors in addition to in-house
services.

44
THE ASIAN PERSPECTIVE

Will Internet banking ever take off in Asia? Although much of the region is
wired, obstacles remain. Customers are concerned about security; the banking
products available so far tend to be unexciting; and in the wake of Asia's recent
economic crisis, many smaller banks have been preoccupied with the more urgent
issue of survival. But some evidence suggests that on-line banking will succeed if
the basic features, especially bill payment, are handled correctly.

Meanwhile, human tellers and automated teller machines

continue to be the banking channels of choice, and only a tiny
minority has recourse to Internet banking. Among middle-
and high-income people questioned in a McKinsey survey,
only 2.6 percent reported banking over the Internet last year.
In India, Indonesia, and Thailand, the figure was as low as 1 percent; in
Singapore and South Korea, it ranged from 5 to 6 percent.

Overall, Internet banking accounted for fewer than 0.1 percent of these
customers' banking transactions—a figure unchanged from 1999. (By contrast,
telephone transactions have doubled since then, to 0.6 percent.) The Internet is
used more often for opening new accounts, but again the numbers are small:
fewer than 0.3 percent of respondents used it for that purpose, except in China
and the Philippines, where the figures climbed to 0.7 and 1.0 percent,
respectively.

45
Bankers can't blame limited access to the Internet for the slow uptake: 42 percent
of respondents said that they had access to computers and 7 percent to the
Internet. The chief problem in Asia and throughout emerging markets is security,
which more than half of the respondents reported as their main reason for
declining to open on-line banking or investment accounts. Respondents also said
that they preferred to have personal contact with their banks.

Access to high-quality products is an issue as well. Most banks in Asia are only
beginning to offer Internet banking services, and many of the services are basic
compared with those available in other parts of the world. Citibank, which has
marketed a range of Internet banking products in the United States for years,
didn't add bill payment to its Hong Kong service until last year—and even then,
for only 11 companies.

Nonetheless, Internet banking appears to have a future in Asia. When the

responses to the McKinsey survey were analysed, the following three segments
were uncovered:

1. Lead users: In the group studied, 38 percent of the respondents said that
they intended to open an on-line account in the near future. These lead
users undertake one-third more transactions a month than do other users
and tend to employ all banking channels more often.
2. Followers: The responses of an additional 20 percent suggested that they
would eventually open an on-line account, especially if their primary
institution offered it and there were no bank charges.
3. Rejecters: Only 42 percent showed little interest in or an aversion to
Internet banking. These respondents also had a preference for
consolidation and simplicity—that is, for owning fewer banking products
and dealing with fewer financial institutions.

Conducting complex activities—for instance, trading securities or

applying for insurance, credit cards, and loans—over
the Internet appealed to no more than 13 percent of the

46
lead users and the followers. One-third of the lead users and the followers
preferred to undertake basic functions, such as ascertaining account balances and
transferring money between accounts, over the Internet. Some of these basics are
hard to supply, however. Bill payment, for example, was the most popular
feature, cited by 40 percent of respondents, but the service is difficult for banks to
provide because it requires a high level of security and involves arranging
transactions with a variety of players.
Functions Preferred by Asian Users (Diag. 4)

47
THE INDIAN PERSPECTIVE

The experiences of the west are the clear indicators that Internet Banking is not
far off for India. The Internet usage, combined with aggressive moves by new
Internet players in this highly fragmented industry will have profound effects on
financial services.

But are the Indian banks ready for this sudden change? Where do we stand as of
today? Would future be as diverse as today or would traditional banks painfully
lose incremental revenue growth opportunities to a host of aggressive players that
may rapidly consolidate the new revenue opportunities in the business. And what
exactly do the banks need to do to meet the challenges of “Banking Business
without Barriers.” Lets try and find out.

Internet Banking Scenario

The lead in Internet banking in India has been taken by the new private sector
banks and foreign banks, and the four banks which offer Internet banking
facilities in a significant way are ICICI Bank , HDFC Bank , Citibank and
Global Trust Bank. Banks like UTI Bank, IndusInd, SBI also offer net banking
facilities in a limited way.
( - Annexure I)

( - Annexure II)

The current base of online banking customers has been estimated at 4.2 Lakhs,
which is 8.7% of the overall Internet user base. The user base as of December
2002 has been estimated under alternative scenarios: The conservative scenario

48
puts the user base as of 31st December, 2002 at 41.0 Lakhs (14.7% of the Internet
user base), while the more optimistic forecast puts the user base at 73.0 Lakhs
with an overall penetration of 26.2%. ICICI, HDFC and Citibank have emerged
as the early leaders in online banking, with ICICI being the clear leader.

Research revealed that close to 40% of adult Internet users have accounts with
one of the four major Internet banks offline. However, only 10.8% of adult
Internet users are banking online.

In terms of activities, there is still a reluctance to actually conduct financial

transfers online, and the bulk of online banking activity is restricted to checking
balances and statements online. Barely 30% of online bankers have paid bills
online or transferred funds online.

Specific aspects of the Indian banking scenario which are pertinent to note are:
 The low ATM penetration
 A regulatory framework which is not conducive to net only banks
 The relative lack of inter branch networking and e-readiness of major
public sector banks, which control a bulk of the deposit and branch
network base
 The relative nascence of the Internet itself
 The entry of many new players
 The recent IT Act which accepts the legal validity of digital signatures
 Plans of Indian public sector banks to provide e banking services by 2002
 The rapid growth of the Internet

The last 4 points – from entry of new players to rapid growth are factors, which
should enable the growth of online banking in India.

49
INTERNET USAGE IN INDIA

It is necessary to discuss the Internet usage pattern in India and to see the growth
to make a case for e-banking in India.

According to eMarketer, India has roughly 1.8 million active Internet users (in
the year 2000). This number, however, is set to grow as Internet connections
become more prevalent throughout the country. One thing we must address is the
fact that the country's income distribution is highly unequal, thus only a small
fraction of the population can be considered a target for potential Internet use.
This part of the population, however, is well-educated, cosmopolitan, media-
savvy and is an early adopter of new electronic devices and new technology.

Internet Usage Statistics In India (Diag. 5)

50
Internet usage in India tends to follow the same pattern as other developing
nations, with a majority of users being young and male. They also tend to be
more educated. It is seen worldwide that internet banking is mostly used by
people between the age 24 – 40. It is also seen that most internet banking usage is
by male population. Thus, the next two diagrams show that Internet banking in
India is here at the right time.

Age Breakdown of Users in India – 2000 (Diag. 6)

Online Gender Divide in India – 2000 (Diag. 7)

Cybercafes are popular gathering places among young, novice Indian internet
users. The popularity of these cybercafés is playing a major part in fuelling the
internet development in India. The cafes provide easy entry points for novice
users. In a new study, internet research firm NetSense found that almost 40% of
the users accessing the internet via cybercafés have less than one year of surfing
experience.

Overall, one can make the following comments about internet usage in India.

51
 Cybercafes in India play a critical role in introducing new users to the
internet. Over time, however, as users become more comfortable with the
internet, they tend to access the internet more from home.

 Indian users show stronger preferences for e-mail and web surfing than
shopping. Their hesitancy to shop online could stem from two major
factors:
1. Shopping tends to be an enjoyable family activity; shopping
online is too impersonal.
2. Indians fears of using credit cards online are preventing
business-to-consumer activities from proliferating.

 In terms of SEC
- 52 % of users are from SEC A
- 25 % from SEC B
- C contributes 17 % with the rest scattered in D & E

 The majority of Internet users use it for e-mail.

 The phenomena is mainly attributed to the top 7 metros i.e. Mumbai,

Delhi, Calcutta, Chennai, Bangalore,

 Internet in India is still in infancy.

 As of December 2000, there was a PC base of 5 million PCs. Out of these,

there were more than 3.7 million machines that had Pentium I and above
processors (i.e. machines which could be effectively used for Internet).

 The prognostications for the future reveal a potential Internet access

figure of a mammoth 50 million, by December 31, 2003.

Growth in Internet Subscribers in India (Diag. 8)

52
While current Internet statistics at first glance might appear a bit modest (we're
still lagging behind stalwarts China, Japan and Taiwan), they do represent a
gradual quickening in the pace of our grand Internet marathon.
Crystal ball gazing by Nasscom has unveiled an even more impressive Internet
usage scenario. The survey has revealed that there is still a current pending
demand of an additional one million Internet connections at current cost
considerations. The good news is that with improvements in bandwidth and
penetration of Internet through PCs as well as cable TV, the Internet user base in
India will expand by leaps and bounds.

In fact, by the end of 12 months, India should have Internet through the cable
reaching at least 16 key cities across the country.

The cable route in fact is being touted as a significant pathway

for the proliferation of the Internet in India. India already
boasts of 37 million cable connections (expected to jump to
100 million by 2008), which could additionally be converted into
Internet connections.

The Internet and PC penetration is increasing by leaps and bounds. Therefore, we

see that everything points towards success of E-banking in India.

53
RBI INITIATIVES

INFINET
Information technology and the communication networking systems have a
crucial bearing on the efficiency of money, capital and foreign exchange markets
and have manifold implications for the conduct of monetary policy. In India,
banks as well as other financial entities have entered the world of information
technology and computer networking with INFINET.

The Indian Financial Network (INFINET), a wide area satellite based network
using VSAT technology, was jointly set up by the Reserve Bank and Institute for
Development and Research in Banking Technology (IDRBT) at Hyderabad to
facilitate connectivity within the financial sector. The network was inaugurated in
June 1999.

The INFINET was planned to cover, in a phased manner, 100 commercially

important centres and serve as the communication backbone of the proposed
Integrated Payment and Settlement System (IPSS).

The Indian Financial Network (INFINET), which initially comprised only the
public sector banks, was opened up for participation by other categories of
members. 26 public sector banks achieved the level of 70 per cent of business
captured through computerisation by June 2001.

54
Banks and financial institutions had taken a decision to adopt SWIFT . -like
message formats for putting all their funds based applications on the Internet.
This initiative would not only help standardisation in banks but would as well
help cross border Straight Through Processing so as to ultimately integrate our
financial system with other cross border financial systems.
( - Annexure III)

Committees
Rangarajan Committee ( I )
In the early 80s, a high level committee was formed under the
chairmanship of Dr. C Rangarajan, then Governor of the
Reserve Bank of India, to draw up a phased plan for
computerisation and mechanisation in the Banking
Industry over a five year time frame of 1985-89. The focus by this time
(justifiably) was on customer service and two models of branch automation were
developed and implemented
 front office mechanisation where front desk operations were computerised
while back office work was done manually and
 back office automation covering mechanisation of General Ledger and
back office operations while the front office work was done manually;

Both the models provided the customer with error-free accounting, regular
statements of accounts etc. Considering the contemporary level of
computerisation, these were major achievements but did not go far enough and
the pace of their implementation was tardy, to say the least, with not a little
opposition from trade unions.

Rangarajan Committee ( II )

55
Having gained experience in the earlier mode of computerisation, the second
Rangarajan Committee constituted in 1988 drew up a detailed perspective plan
for computerisation of in Banks and for extension of automation to other areas
like funds transfer, electronic mail, BANKNET, SWIFT, ATMs etc.
 Around 2000 to 2500 large branches located at high activity (urban and
metropolitan) centres to be fully computerised
 Regional Offices / Zonal Offices/Head Offices
 Inter- and intra bank transactions using the BANKNET set up by the RBI;
and
 Installation of a network of cash dispensers / ATMs at strategic locations
such as airports/railway stations etc., on a shared basis by banks.
The Committee also made studied recommendations on the 'Single Window
Concept; 'all bank credit cards', credit clearing/GIRO system, office automation,
etc. In fact this report was the most comprehensive road map for Bank
Automation considering the state of the technology at that time.

Vasudevan Committee
To further upgrade the existing technology in the banking sector and also to
suggest measures for implementation, the Reserve Bank appointed a "Committee
on Technology Upgradation in the Banking Sector ". The Committee in its
Report, submitted in July 1999, recommended a new legislation on Electronic-
funds-transfer system to facilitate multiple payment systems to be set up by banks
and financial institutions.
( - Annexure IV)

Law
The Information Technology Act, 2000 has given legal
recognition to creation, transmission and retention of an electronic
(or magnetic) data to be treated as valid proof in a court of law,
except in those areas, which continue to be governed by the
provisions of the Negotiable Instruments Act, 1881.

56
Payment System Legislation in the form of amendments to various Acts as also
the need for framing new legislation for the regulation of multiple electronic
payments is under consideration of RBI. Several measures to ensure the
authenticity of the message across the Internet have been suggested by the
Working Group on Internet Banking.

RBI has also laid down guidelines for electronic banking.

( - Annexure V)

Electronic Payment Mechanisms

With the advancement of technology, new delivery mechanisms have been
introduced in the financial markets, giving rise to potential risks. These risks have
to be tackled. This calls for modernisation of Payment Systems to increase
efficiency and reduce risk.

In order to improve payment flows, the RBI has been taking measures with the
employment of appropriate technology from time to time. The bank has put in the
following solutions (managed by RBI, SBI and the nationalised banks) in this
regard:
 Mechanised clearing of cheques using MICR technology first at Metros
managed by RBI and subsequently at other centres managed by some
public sector banks.
 Inter-city clearing among MICR centres at the 4 Metros (two-way) and
other offices of RBI with these four Metros under one-way inter-city
clearing.
 Regional Grid Clearing connecting important commercial centres/district
headquarters in a region to the nearest MICR centre under one way
clearing.

57
  Electronic Clearing Services (Debit, Credit, RAPID) for clearing of bulk
payments like dividend warrants, utility payments like electricity bills,
etc.
 Floppy input-based clearing.
 High-value clearing (floppy based)

Lack of a reliable communication infrastructure in our country hampered

modernisation of payment systems and consequently clearing and payment
instructions, which are of non-local nature takes unduly long time. With
INFINET, the RBI VSAT network for banks this bottleneck maybe removed and
steps are being initiated to use INFINET to improve the payment flows. It has
been decided to consolidate on the steps already taken and leapfrog in areas like
Real Time Gross Settlement (RTGS) System and graduate to an integrated
national payments system in the long run. As a step towards achieving this, pilots
have been started for implementing Electronic Data Interchange in major sectors.
RTGS
RBI has initiated measures to set up a Large Value Funds Transfer and
Settlement System on a Real Time Basis (or Real Time Gross Settlement
System). Such a system will be extremely critical in the development of a stable
and efficient financial infrastructure.

The RTGS architecture would consist for an Apex Level Server that would have
a persistent queuing system to receive the messages and execute instructions
subject to specified fulfillment conditions. This would connect through a network
to various Bank Level Servers for the member banks. These bank level servers
would be connected to their branches through the VSAT network.

The RTGS will provide the infrastructure for a real time nationwide dynamic
funds management by the user institutions. Such a system has the potential for
integrating the money markets and security markets across the country. The
potential volume, nature and type of transactions that are likely to flow through

58
the above network may relate to forex, money market securities, inter bank
claims, large corporate flows etc.

Electronic Fund Transfer

This is a system that IBA offers that is better-applied and waiting
for appreciation. EFT is probably the safest and fastest way to
transfer money from your account to another individual in another
city regardless of which bank she uses.

All the transferor needs is her account number. A maximum of Rs0.1mn can be
transferred for a flat fee of Rs25. The bank has discretionary powers to raise the
limit for select customers. Or a customer can break up the transactions in to
multiples of upto Rs0.1mn. The money sent is credited overnight and can be
withdrawn by the receiver the day after transfer.

The hitch, it is not well known and secondly, the facility is only available in the
four metros! Plus, money sent from abroad cannot be transferred through EFT.

Disclosing other advantages of the EFT, an official of the IBA's department of

information technology, says, "The facility can be availed of even if the branch
from where you are sending the amount is not fully computerized. The details of
the transfer have to be sent to the RBI which in turn notifies the receiving bank to
credit the individual with the mentioned amount."

Electronic Clearing Systems

Never mind the vagaries of the stock market. For those who are and will always
make equity investments a way of life the ECS has made that life a lot easier as
far as dividend payments go. All a person has to do is provide the company with
details about the bank where the deposits should be made. The firm can then
directly deposit the dividends into the shareholder's account. The maximum that a
company can deposit is Rs0.1mn, though here too, the bank has the discretion to
raise that ceiling.

59
Dividends, Interest on Bonds/Debentures, Salary, Pension, etc can now be
credited directly to the beneficiaries’ bank accounts through ECS (CREDIT)
services. Similarly, you can make payments of Telephone Bills, Electricity
Charges, School Fees, Credit Card Dues, Tax Payments etc. using ECS(DEBIT)
services.

Apart from being a free service, from four metros the facility can now be availed
of in 15 cities (those that have regional RBI offices) including Ahmedabad, Pune,
Thiruvananthapuram and Nashik.

SWADHAN - Shared Payment Network System (SPNS)

To provide anytime, anywhere banking, in consonanace with the views of the
Managing Committee , IBA (Indian Banks Association) set up a network of
ATMs in Mumbai.

SPNS as envisaged by the IBA is a large network of ATMs, Cash Dispensers

spread originally over the city of Mumbai, Vashi and Thane connected to a
central host. Today, the network has expanded to connect ATMs all over India.
The banks which participate in this network would issue cards to the customers
for transacting on this network.

The objective behind forming the Shared Payment

Network System is to provide 24 hours, 365 days/year
electronic banking service to the customer anywhere in
the country through state of the art electronic fund
transfer system to be shared by different participating
banks. The SWADHAN-SPNS project is the first of its kind in India. The
SWADHAN-SPNS went on live on 1st February, 1997 with 4 ATMs of 4 Banks.
Currently there are 350 ATMs of 36 banks connected to the network. (i.e. as on
December 15th, 2000)

Shared Payment Network System would be capable to offer the following

services:

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Cash Transactions, Extended hours service, Across the bank payments, Utility
payments, Balance enquiry, Printing of statement of accounts, Cheque Deposit,
Request for Cheque book Standing Instructions and Statement of account, Point
of Sale (EFT/POS) facilities

Advantages of SPNS:
 Cash holding at home can be reduced.
 Direct improvement in customer services.
 Benefits of standardization.
 Cost of service is minimized.
 Improved centralized control ensures ongoing compatibility with national
and international standards and systems.
 Easier technology absorption and building the base for indigenous
development capability.

Under SWADHAN, a member bank enjoys the benefit of maximum ATMs with
minimum investment. Also each member bank earns revenue in the form of
acquiring transaction of other banks card holders. Anytime banking and
anywhere banking became a reality under the SWADHAN-SPNS.

What is SWADHAN ? SWADHAN is a registered trademark for electronic

banking services, owned by Indian Banks' Association, on behalf of its members
and only institutions which are members of the SWADHAN-Shared Payment
Network System are permitted to use it.

Benefits to Customers :
 Easy access to cash, Day & Night, on Weekends/Holidays.
 Fast Service. No need to wait in queues.
 Convenience of Location : ATMs can be placed in any convenient
location in the city.
 Privacy in transaction.
 Free from errors.

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  Flexibility in withdrawals.
 Less crowding at Bank Counters.
 24 hours, 365 days service.

Benefits to Banks :
 Increases market penetration.
 Provides an alternative to extended hours.

Debit/Smart Cards
RBI has issued guidelines to the banks for issuing debit cards and
smart cards as alternative payment instruments to ease pressure
on physical cash.

Debit cards are plastic cards issued by banks to customers who could use them
for paying for their purchases at specified Point of Sales terminals. The cards
facilitate the customers to effect the transactions on their own accounts
remotely.

Smart card has an integrated circuit with a microchip embedded in it so that it

could perform calculations, maintain records, act as electronic purse. The cards
can either be exhaustible or rechargeable.

The RBI guidelines issued include criteria on the eligibility of customers to

whom the cards can be issued, payment of interest on the balances transferred to
the smart/debit cards, treatment of liability in respect of outstanding/unspent
balances on the smart/debit cards, security aspects and other terms and conditions
for issue of these cards by the banks.

62
CHALLENGES FOR INDIAN E-BANKS

The challenges that Indian banks are facing are:

1. How to manage multiple distribution channels?
Internet banking is bound to become the most important channel in next few
years. Even the traditional banking would move towards Internet technology
with open standards and low cost. Although all traditional channels would not
die down in a day and success would depend on how the banks generate synergy
in these two vastly different channels. The services provided in all types of
distribution channels must be in tandem with each other and must be in synergy.

2. How to address the issue of internationalization i.e. how to take in and make
e-banking an integral part of one's attitudes or beliefs?
The real challenge for Internet banking is to penetrate the customer base of
banks. According to IDBI Bank’s head (e-commerce and new product initiatives)

63
J Venkataramanan, the maximum usage of Internet banking is for accessing
account balances and making bill payments. For most customers, there's nothing
more reassuring than watching their cheques getting credit on a paper ledger.
Then, there is the question of how real is real time. For instance, while you can
requisition for, say, a new set of cheques any time of the day, the request will get
processed only during the banking hours.

Perhaps, the biggest of all concerns for e-banking customers is

the security issue. People still aren't comfortable having
information about their life's hard-earned money saved on a
server they don't know about. A physical pass-book is still preferred. While e-
bankers use multiple firewalls, filtering routers, 128-bit encryption and digital
certification for safe and confidential transactions, there are still chances of a
snafu.

Another problem is that an on-line service that merely mimics an off-line one
doesn't give customers an adequate inducement to move a significant portion of
their banking on-line. As a result, most customers tend to treat on-line banking as
no more than an extra channel to check their balances and transaction histories,
and they continue to do the rest of their business at the ATM or the teller
window. A vicious cycle ensues.

Also, there is no more security and customer loyalty. With Internet, the gateway
to low cost international expansion around, tackling the virtual competition
would be a key. Competition is just a ‘click’ away. Customers would be loyal as
long as the rates offered are competitive.

At the same time, banks would have to manage different product

portfolios, at different yet competitive prices to different
corporates across the world. The issue of offering services in
multiple geographies / customers – due to increased global access and
competition may ask for new virtual alliances between small local banks and the
global players.

64
3. How to address the emergence of value-focused specialist competitors that are
competing for specific value components currently dominated by banks and now
are increasingly gaining access to the bank’s customers?
The real trouble is that Internet Bank doesn’t really need to be a bank. It can
even be a group of innovative persons with no bank branch at all, just working
through alliances and leading the field because of their superior capabilities
through focus and innovation advantage.

The entry of multiple non financial institutions and other non-traditional players
would just fasten this whole process. E.g. Times Bank and IDBI Bank.

4. How to focus innovation potential onto designing new products and services
facilitated by Internet delivery?

STRATEGY FOR INDIAN BANKS

Internet banking would drive us into an age of creative destruction due to non-
physical exchange, complete transparency giving rise to perfectly electronic
market place and customer supremacy. The question to be asked right now is
"What the Indian Banks should do"?

Most banks today are pursuing what might be described as a ‘fortress’ strategy,
defending themselves against new entrants while waiting for more clarity in the
online world. The fortress strategy has the benefit of relying on traditional
sources of advantage; it plays to the strengths of current legacy banks. The risk,
of course, is that these sources of advantage may not be enough to keep out new
entrants that rely on a totally different business model.

Banks must today at least hedge by experimenting with the web business model.
But it calls for profound organizational changes if it is to be executed

65
successfully. It needs the banks to fundamentally re-assess their opportunities for
adding value and hence re-define their roles in the new paradigm.

Banks must first determine what kind of web to target. Customer

webs focus on maximizing a bank’s share of wallet of a target
customer segment while Market webs seek to aggregate a
critical mass of buyers and sellers within one transaction category.

Within any web that it might target, there are a number of possible roles a bank
could play. Web shapers are the one or two companies that own a shaping
platform, take initiative to mobilize other companies around it, and define a set of
standard practices or policies to coordinate participant’s activities. Banks that
choose not to be Web shaper would be adapters and would need to define a clear
niche that will help them differentiate themselves from other participants. Some
adapters may become influencers, working closely with shapers to ensure the
overall success of their web.

Indian banks still have a few important lessons in customer service that they
would do well to pay heed to.

Customer Relationship
Banks and other financial institutions cannot go completely virtual - they need
physical branches after all. This is probably one area where Internet banking in
India scores over the 'stand alone' Internet banks of the West. Several Internet
banks like E-trade have acquired ATM networks like Card Capture Services to
offer consumers a way to deposit and access their money through ATMs.

Physical branches help forge a 'relationship' with the customer that a virtual bank
cannot. Although most online consumers utilise account tracking, bill pay and e-
shopping, they would prefer direct, personal contact with their banker when
shopping for financial products.

Personalisation

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Banking solutions become truly personalised when they are able to respond to the
changing customer needs, and this is possible using strong data mining and target
marketing capabilities.

For example, software that might tell you which credit card balance to pay off
first, or alert you in advance when your cheque will bounce. This level of
personalisation is still lacking in the banking solutions offered by Indian banks.

Integration
Another important aspect is integrating customer service
interfaces and channels, so that the customer deals with a single
channel that caters to diverse needs such as kiosks, ATMs, Web
TV, mobile phones, pagers, and branch counters. Banks have to get
their acts together. If the SmartCards, and the Online Banking, and the ATM's,
and the Branches don't work together, there's no real benefit in having the
electronic tools.

Customers shouldn't have to go to one site to just pay their utility bill and phone
bill and then have to go offline to pay their cable and credit card bills. They
should be able to check the value of their investment portfolio, updated daily, in
their personal balance sheet, include all their other assets and other personal
finance.

Banks must learn to aggregate their customers' different on-line financial-services

relationships. The purpose of aggregation is not to engage in blatant cross-selling
or to achieve "100 percent share of wallet" but rather to develop a picture of the
consumer's entire balance sheet. Any institution that gains such a view can
provide superior convenience and advice.

Banks need to be 'one-stop shops' for an entire range of personal finance

products- from loans and insurance to mutual funds and even tax-saving
instruments. This is being done by 'account aggregators' such as Yodlee,
Corillian, eBalance and VerticalOne that let you log in to one Web site, enter

67
your username and password, and track information as diverse as bank and
credit-card balances, value of investments, and frequent-flier miles from several
sites, each of which has its own username and password.

Innovation
Today's value-added product could easily be tomorrow's commodity. That is why
banks would need to depend more on product innovation, expanding the range of
their products and service offerings. Apart from just online accounts, e-banks
would need to tailor specific products for the Internet, like online bill presentment
or credit cards with instant online approval. Many Internet banks like Egg have
taken the lead in offering innovative products like Egg card - a credit card that
features an introductory zero-percent interest rate.

Migrate old customers and go after new ones

In building an on-line business, a bank's off-line customer base
is a huge asset, for it will be harder for competitors to pick off
the bank's current customers than for the banks to get them on-
line. But to do so, banks must make one-time offers and then constantly provide
incentives such as free services (for example, bill payment and on-line trades) for
increased balances.

Banks must also move swiftly to acquire new on-line customers. Most of the
early attempts to do so, carried out in partnership with Internet portals, have
flopped-largely because the banks failed to offer any differentiation in pricing or
any other very compelling lure. Yet here, too, banks have an advantage. Despite
significant increases in revenue from on-line relationships, credit card companies
and brokerage firms have spent so much money building their on-line customer
base that some would question whether they will ever profit from these efforts.
Most banks already have a powerful retail distribution network that should allow
them both to migrate their customers and to acquire new ones at much lower cost.

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Banks will have to reinvent their role and the way they deliver value-leveraging
new technology as well as their existing assets-to remain their customers'
financial institution of choice.

Citibank’s Suvidha

Transfer funds to other Citibank accounts, order drafts to be couriered to over

200 locations absolutely FREE, pay your bills online, check account information,
view your statement on the net stop payments, order cheque books and more!
This is Citibank’s online banking service – “Suvidha”.

An interview with the Mr.Sandip Patil, Business Development Manager –

Ecommerce & Ebanking – Global Corporate Banking – Citibank.

 Why would a bank start e-banking? Why did Citibank start?

Banking business is heavily dependent on information and distribution and e-
banking provides tremendous value in this respect. E-banking establishes a
different standards of service to the customer set and allows a bank to
differentiate in the market place.

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Also, it allows the bank to cut processing costs and allows efficient usage of
technology to reduce errors, thus increasing service standards.

Citibank is a pioneer in using technology to deliver banking values and has a

history of doing it across 100 plus countries for decades together for the reasons
mentioned above.

 What is the process for starting an online branch? Are there Legal
procedures?
Indian Banking Act does not recognize an online branch. However, automation of
transactions is recognized under guidelines of payment gateways or IT act.
Essentially, banking remains under purview of RBI and online branches do not
seem feasible for next 3-5 years. Existing banks are free to offer e-banking,
which can be viewed as online banking services.

 What is the main Cost area? What is the approximate cost for starting
an online branch?
Costs are a function of various factors like infrastructure, capacity, technology,
and security standards. However, for the predicted usage level, this can be less
than half of off-line banking

 What are the facilities that Citibank provides?

All banking facilities that are provided in off-line world are available
online (subject to prevalent regulations) e.g., balances, information,
statements, DD/Pay order, bulk payments, bill payments, vendor
payments, statutory payments, accounts receivable, payment gateways,
etc

 Benefits to customer – individual and wholesale

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Benefits to individual customers are in the nature of optimizing his decision
making process and also, accelerated service. For corporate customers, the
benefits are in the nature of automating processes, reducing back-office work
(reduced costs) and online service (information) With ERP systems coming up
faster, wholesale customer systems can communicate with banking system and
avoid all possible delays.

 Who is a typical target customer in India? (Age group, income, etc.)

Retail: Working middle class, High net worth individuals, self-occupied people
Wholesale: Manufacturing companies, service companies, financial institutions

 What kind of e-banking do you do? Retail and wholesale? Which one
is more? Why?
We offer all types of electronic banking under retail and wholesale. We are rated
no.1 in Indian market by the latest Business World and are no 1 globally rated by
Euromoney, Asian banker, Finance Asia, etc.

In India, usage of retail banking is more in number (in million instructions p. a.).
However, the base of usage is extremely high. Corporate banking is undergoing
revolutionary trends with almost 20% of instructions undergoing e-Banked.

 Disadvantages
None.

 What have been the major complaints by customers?

Availability of network i.e., Internet infrastructure in India

 What systems of online payment do u follow?

Internet Based Payment Gateway

 What are the security measures?

128-bit SSL security, dynamic passwords

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  How did you develop the e-banking backend technology? Vendor? Or
self? Why?
We have an internal technology division with more than 5000 people. We do also
have more than 200 vendors developing various products for us.

 Which technology should the banks/financial institutions be adopting?

Banks should be adopting web-based technologies (simple to use, simple to
change, universal, cheaper), web-based connectivity (wider reach, lower costs),
Open standards of communications (XML, OFX, EDIs Banking)

The application areas can range from online banking services (transaction
initiation, product information) to CRM to mobile banking to ERP integrated
services

 Another very important consideration is the maintenance time

necessary for daily updates to be performed by the host system. How
will Internet banking customers access their information during these
times?
This is an essential process in system cycle and most of the players handle this
cycle in off-hours (from 11 p m onwards). Daytime the system is always
available. The EOD process can take 1 or 2 hours, which can go upto 5-6 hours
on month ends and 9-10 hours on year-end. This involves finalization of books of
the bank i.e., post all internal entries like accruals, portfolio MTM, etc

 What is the most imp factor of success in online?

Commitment to eBanking along with a deeper understanding of customer needs.
This can come only when you have a very big base of customers, best people,
experience of operating in various countries and a service attitude.

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WHERE IS E-BANKING IN INDIA HEADED?

There will be a large-scale shift to online banking in the next decade as banks go
the extra mile in technology developments to keep up with the competition It is
believed the low transaction cost will make banking on the Net irresistible, but
also that this will require institutions to carefully consider and plan customer
relations programs.

It is believed that everything will be determined by content and context, and

where execution will be key. From a customer and service provider perspective,
this is where the world is moving-it is going to be real-time, on-line,
personalisation for both marketing and the service experience. If existing banks
don't want to disappear, it is this challenge that they need to embrace in order to
win and survive.

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Internet usage is expected to grow with cheaper bandwidth cost. The Department
of Telecommunications (DoT) is moving fast to make available additional
bandwidth, with the result that Internet access will become much faster in the
future. This is expected to give a fillip to Internet banking in India.

The setting up of a Credit Information Bureau for collecting and sharing credit
information on borrowers of lending institutions online would give a fillip to
electronic banking. The recommendations of the Vasudevan Committee on
Technological Up gradation of Banks in India have also been circulated to banks
for implementation. In this background, banks are moving in for technological up
gradation on a large scale. Internet banking is expected to get a boost from such
developments. Other major developments will be:

Inter Bank Fund Transfers

Today, e-banking operations mainly consist of
providing information viz. requesting check books,
statements, fund transfer, even online share trading
(with reference to a particular branch) but the next two or three years are likely to
see a huge change in the entire banking value chain. It would be possible to
process any inquiry or transaction online without any reference to the branch at
any time rather like 'anywhere banking' - a service already being offered by
HDFC, ICICI and Citibank.

Interbank fund transfers between different banks is a feature that is not offered by
any of the e-banking services in India. "At present, we have no plans to offer
third-party transfer outside the bank. Globally, this is not allowed due to security
reasons. Also, the other banks also have to allow transfer/debit of funds into/out
of their NetBanking system. According to HDFC, the RBI needs to set up a
clearinghouse to route these transfers, and thus enable such transactions.

M-Banking

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Today, with mobile being the 'in-thing', banks are not far behind to position
themselves for this new medium to ring in customers and convenience. Most of
them are talking about helping people access information of their accounts and
even do transactions while on the move-calling this M-banking (mobile banking).

Almost all major banks have SMS-enabled mobile banking. The use of WAP-
based applications for Internet banking is an increasing trend especially in the
Asia Pacific region, though it doesn't seem likely that it will catch on in India
given the miniscule populace of WAP-enabled phone users.

"We have plans to offer WAP-enabled FedNet soon" says Nair of Federal Bank.
"WAP-enabled banking will become popular and affordable to a larger number of
users if the cost of the devices drop and airtime tariff come down."

Account Aggregation
A new wave called 'Account Aggregation' is slowly sweeping through the online
banking/brokerage industry. Account aggregation -- or account consolidation --
provides consumers with the ability to access the information about all of their
financial transactions sourced from different web sites, at a single web site.

Now you can obtain updates of all of your investments (from banks, mutual
funds, online brokers), and liabilities (car loans, credit card loans, bank loans) at a
single point. That way you don't need to remember multiple login IDs, and
passwords, and also don't need to consolidate this information yourself. Further,
at the same site you shall be able to get 'payment due' reminders, online payment
services and even query your transactions to find, say how much you spent on
entertainment last year. They could also provide you with e-mail, book your
airline tickets and more.

True Relationship Banking

The future will provide the bank with the ability to allow account access and
control privileges at the customer level. This means that all accounts in a
relationship will be accessible via the Internet while only a subset of these

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accounts will be viewable and accessible for a third party (such as son or
daughter who is away at school). It allows your tax consultant to view accounts in
your relationship pertinent to performing their service. And, business customers
will see their entire commercial relationship bank.

Integration
Service Providers will integrate and market their offerings across different
channels. The strategic and executional battles of the future are going to be
fought for Channel Integration.

The beauty of integration is that one channel does not displace another. They feed
on each other to create incremental value for the customer, as well as the
institution. The incremental value comes from two distinct sources. Firstly, you
reduce inefficiencies. You don't send people junk mail because you know that
they are not likely to buy a particular product or service today. That results in net
saving for the economy. Secondly, you persuade people at the right time (the
right time from the customer's perspective, not from the service provider's
perspective) to opt for a tailor made offering. This too increases value. Actually,
this has to do with the Internet itself, and more to with the underlying
technologies of the Internet which allow incremental efficiency, and empowers
the customer to make more enlightened and timely choices.

While the novelty of the service will attract customers to bank online, right now
only customer service will determine whether Net banks get the thumbs up.

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THE VERDICT

In concluding one may state that Indian banking in the new millennium is likely
to be driven by mergers, universal banking and Internet technology. While
mergers will confer economies of scale, universal banking will dismantle the
barriers between the traditional dichotomies of financial services. While one
realizes the fact that the Internet is likely to convert banking into a commodity
one has to take into account that thirty years of solitude has steeped Indian Banks
into a morass of inefficiency, slothfulness and complacency. If Indian banks
refuse to visualize this trend they may well be consigned to history. However, if
they react proactively Indian Banks stand to gain a lot from the opportunities that
E-banking offers.

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The verdict is that customers are more demanding than ever and their demands
will continue to grow at a faster and more aggressive pace. Service providers
have to think about the way they have approached things in the past and
reposition themselves for the future. If they are to be able to meet the needs of the
customers tomorrow, it will largely be through the Internet as a key delivery
channel.

However, it is not that the branch network will disappear. Customers will always
find solace in the sense of assurance that a blue-chip brand is embodied by a
physical presence, especially in financial services. It is just that the ability to
check a financial portfolio at a whim has great appeal. So customers will not
disregard the practice of occasionally dropping into the branch for a face-to-face
interaction with a friendly teller but they will avail of -- and demand -- the ability
to access their up-to-date product portfolio through whatever channel they
choose.

It also needs to be stated that the on-going process of reforms cannot be

successful without a supporting and complementary legal framework which can
provide for both strong internal governance in the financial system as well as
external discipline by market forces, as suggested by the Narasimham
Committee. Also, an effective system needs to be put in place to tackle money
laundering and financial frauds.

In India, E-banking is in a nascent stage and people are still wary of the concept
and its usage-the biggest inhibitors being security and user
identification/authentication. "I wouldn't describe E-banking in India in its
present form a huge success. The technology and concepts are gaining
acceptance. People are beginning to see the convenience and benefits of E-
banking. I believe that in a few years' time it will not only be the acceptable mode
of banking but also, more importantly, be the preferred mode of banking. In all
this the key is faster penetration of the Internet in the home segment-either
through PCs or through other Internet access devices. Also, support for local

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languages from IT vendors will help reduce the digital gap," says Senthil Kumar
of I-flex Solutions.

At the moment, the concept is totally dependent on the availability of bandwidth

and further reduction in Internet access charges. The banks are hopeful that these
would be taken care of and in the near future large numbers would start using
Internet for banking purposes.

"E-banking and M-banking are very much a reality now. They are the newer
delivery channels. Though the acceptance level may not be high among the
masses, nevertheless the segment of population adopting these delivery channels
have a huge purchasing power and banks in no way can afford to ignore their
convenience," observes Singhal of Polaris.

Not all feel the same way though. Countering Singhal's claims, Seshadrinathan of
SSI says, "Frankly speaking, the progress has been slow. Foreign and private
banks have adopted E-banking well, but public sector and old style banks are a
little slow and I foresee a year or so for them to adopt IT in a significant way.
One interesting phenomenon that is emerging is the forging of strategic
partnerships between banking and IT industries. Banks are looking out for IT
partners for effective IT-enabling."

In closing, online banking is just one aspect of the new online financial world.
Such areas as stock trading, taxes, college planning, retirement, debt
management, and mortgage/insurance are being greatly affected by the growth of
the Internet. From the company’s standpoint, those that do not keep up with the
changing face of financial services will be "lunch", and those that do will profit
enormously. The trick is to react in "Internet time". From the customer’s
standpoint, greater connectivity from home will mean more time for more
pleasurable pursuits. The Internet has no doubt changed the nature of personal
finance forever, hopefully for the better.

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And the ball is just getting rolling!

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